Is Ultra Petroleum the Ultimate Investment?

This stock ought to whet this Fool's appetite -- and maybe yours, too.

With more than 5,400 stocks to choose from, the universe of investment possibilities is enormous. You could get tips over the company water cooler or from Internet discussion boards. A better way might be to look for stocks based on what you already know and own.

Motley Fool CAPS helps you focus your energies by providing you with a personalized Stock of the Day. Using its supercomputer, it looks at stocks currently in your active pick list, stocks picked by highly rated players with lists similar to yours, industries in which you currently have active picks, and Saturn's orbit around the sun. Well, maybe not that last one -- but it targets areas in which you already have an interest.

By pairing up the opinions of some of the top investors in the CAPS community, CAPS provides you with a handful of companies on which to begin your own due diligence and research.

Buy what you knowBased on my outperform ratings on companies like Kodiak Oil & Gas and Peabody Energy, as well as my underperform rating on Enerplus(NYSE: ERF) and EXCO Resources in the broad oil and gas industry, the CAPS supercomputer thought I also might be interested in independent driller Ultra Petroleum(NYSE: UPL), one of five Stocks of the Day it offered up for my consideration last week.

With Europe in a deep recession again, China hitting a hard landing, and unemployment here at home once more on the rise, oil prices have taken a beating, falling to around $83 a barrel, while natural gas remains depressed at around $2.40 per million Btus. So let's see what Ultra has going for it that might warrant an investment, even if the supercomputer hasn't yet picked it for you. Just remember, as smart as the CAPS algorithm may be, it's still just an algorithm, so be sure to look before you leap on any of its suggestions.

Ultra Petroleum snapshot

Industry

Oil, Gas, and Consumable Fuels

Sector

Energy

Market Cap

$2.9 Billion

Revenues, TTM

$1.1 Billion

Return on Capital, TTM

15.2%

Dividend and Yield

NA/NA

Cash

$2.5 Million

Long-Term Debt

$2.0 Billion

Free Cash Flow, TTM (OCF-capex)

($474.3 Million)

Recent Price

$18.90

CAPS Rating (out of 5)

*****

Sources: Motley Fool CAPS, S&P Capital IQ.

Free flowing gasThe natural gas industry is in a fix trying to gain control over a market awash in the fuel. Despite selling off assets, as Enerplus is planning on doing, and cutting back on capital expenditures, as both Chesapeake Energy(NYSE: CHK) and Encana(NYSE: ECA) are in the process of achieving, natural gas in storage still managed to rise last week to almost 2.9 billion cubic feet, still well above the five-year average. But consumption is still falling, primarily in the power sector, where usage dropped more than 10%. Rig counts are being reduced, but apparently not at a fast enough pace.

Caught up in this downward spiral is Ultra Petroleum, which has seen its shares tumble 60% over the past year. It has reduced its own capex spending by reducing the number of drilling rigs operating in its Wyoming fields and is encouraging its partners' operating projects on its behalf in Pennsylvania to do the same. They've estimated their capital investment program for 2012 will be $825 million, down 45% from $1.5 billion spent in 2011.

In the March quarter, it said it realized natural gas prices of $3.81 per Mcf, which suggests the current quarter is going to take a hit as a result of a further depressed pricing environment. A year ago it was realizing more than $4 per Mcf. While it has hedges in place guaranteeing $4.32 per Mcf on 150 billion cubic feet of production, there's still tremendous downward pressure being felt.

Succeeding when others failYet it's not all doom and gloom. As much as the gas companies are cutting back on production because the stuff is cheap, the bottom will eventually be hit (some say it already has) and prices will rise once more. Low-cost producers like Ultra that are sitting on all this cheaply produced gas will stand to make a healthy profit when they start selling it at higher prices.

This past winter was an anomaly in its warmth and contributed to an excess of supply, so we probably shouldn't expect the coming one to be as equally mild. Moreover, the cheapness of natural gas is fueling its usage in other areas and could provide an impetus for an expansion of alternative technology, such as nat gas vehicles and fueling stations. The Obama administration's stance toward the coal industry is leading utilities to switch from coal-fired plants to those powered by natural gas.

According to the Energy Information Administration, coal-burning facilities are expected to fall to 10% of total new capacity in the U.S. in 2013, down from 18% in 2009. Gas, on the other hand, will soar to 82% of new capacity, up from 42% last year.

Brazil's Companhia Energetica Minas Gerais, the second largest energy producer in the country, wants to buy Vale's (NYSE: VALE) natural gas reservoirs because it views the energy source "as the best potential for growth over the next five years."

As CAPS member LouPerna points out, the pricing imbalance can't last indefinitely, so that when "the oversupply situation works itself out this well-managed low-cost producer will do well over the coming years."

Risk without reward?With the stock priced at just six times earnings, add Ultra to your Watchlist if you think its opportunities make it a cheap stock, but also let me know on the Ultra Petroleum CAPS page or the comments section below whether you think it's a situation that only works itself out later rather than sooner.

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Author

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.